Unión Fenosa, S.A. is powering ahead with its plans to redevelop itself into a diversified, international conglomerate. Known as Unión Electrica Fenosa until 2001, the company’s electric power generation and distribution business remains at the core of its operations. Unión Fenosa is Spain’s third-largest electrical power supplier, with a diversified power-generation infrastructure—including windmill farms and other alternative sources—capable of generating more than 5,500 megawatts in Spain. The company’s Spanish power generation operations are centered in Madrid, Castilla y Léon, Galicia, and Castilla-La Mancha. Thwarted by its attempt to gain size after the Spanish government vetoed its agreed-upon takeover of number four electricity company Hidrocantrabrico, Fenosa has stepped up its international investments, exporting its power generation expertise, especially to the Latin American market, with holdings in Colombia, Guatemala, Mexico, Costa Rica, Ecuador, Nicaragua, Uruguay, the Dominican Republic, and Panama. Elsewhere, the company has holdings in the Philippines, Moldova, and Morocco. A primary focus of Fenosa’s diversification strategy has been the building up of a strong position in the international gas industry by acquiring and developing operations covering gas production, transportation, marketing, and distribution. The company has scored a number of major concessions, such as the construction of a natural gas liquefaction plant in Damietta, Egypt, and the acquisition of a 20 percent share of the Algerian natural gas pipeline, which has enabled Fenosa to begin providing natural gas to the Spanish industrial market. Elsewhere, Fenosa’s power and utility interests included the UK’s Cambridge Water, a water and electrical power utility. Another key division of the company is Fenosa Soluciones, an engineering and consulting unit dedicated to developing new technologies and services. The company also has holdings in the telecommunications sector, including a share in Auna, Spain’s second-largest telecommunications provider (Fenosa planned to put that share up for sale as early as 2003). However, Fenosa’s heavy investment program has come at a cost. By the end of the 2002, the company, which had built up a debt load of nearly EUR 7 billion, was forced to put up for sale half of its profitable gas division.

A Leading Electric Power Company in the 1980s

Unión Fenosa was formed from the merger of Unión Eléctrica and Fuerzas Eléctricas del Noroeste (Fenosa), in 1982. Both companies operated in Spain’s electrical power generation and distribution market, with Fenosa’s presence in Galicia and elsewhere in northern Spain complementing Unión Eléctrica’s chiefly Madrid- and central Spain-based operations. The newly merged company inherited its predecessors’ crushing debt load—which had reached some $6 billion by the early 1980s—brought on by the Franco regime’s efforts to develop Spain’s electrical power infrastructure and particularly by the country’s decision to add nuclear power generating capacity in the 1960s.

Spain’s electrical industry had started out in the private sector at the turn of the 20th century. Between 1890 and the
beginning of World War I, most of the country’s electrical power industry was controlled by a few groups. Among these was Unión Eléctrica, originally known as Unión Eléctrica Madrileña, which emerged in 1912 when three small electrical power companies joined together to capture the Madrid power market. As with much of Spain’s electrical power industry, Unión Eléctrica Madrileña’s development was hampered by the unsettled political and economic situation surrounding the Spanish Civil War.

The arrival of Francisco Franco to power took control of the country’s electrical power industry out of the private sector. In 1941, the Franco regime created the Instituto Nacional de Industria (INI, or National Industrial Institute), which became the holding company for much of the country’s industry, particularly the components of its infrastructure. The INF’s role was to act as a bridge between the government and industry with the aim of stimulating the country’s industrial development.

The electrical industry was brought under the INF’s control, and the period that followed saw the establishment of many of the country’s leading power companies, including later leaders Endesa and Iberdrola. In 1942, Fuerzas Eléctricas del Noroeste was formed to cover the northern and eastern parts of the country. The INI instituted a variety of changes in the Spain’s power industry, including a single rate structure. The INI also forced the country’s power companies to take the lead in building up a selfreliant infrastructure for the country. As a result, power companies were expected to invest heavily in redeveloping the country’s electrical network and to adopt new power-generation technologies, especially nuclear power generating capacity. Unión Eléctrica Madrileña’s entry into nuclear power came during the 1960s, with its first nuclear power plant coming online in 1968. Two years later, the company, which by then had expanded beyond Madrid to include operations throughout much of central Spain, changed its name to Unión Eléctrica.

By the end of the 1970s, the Spanish electrical industry was capable of producing far more electricity than the country needed, while the race to expand had burdened the markets many and relatively small utility companies with massive debts. This situation sparked a round of consolidation at the beginning of the 1980s, including the merger between Fenosa and Unión Eléctrica, which created the country’s third-largest power supplier, Unión Eléctrica Fenosa. Taking the lead of the newly enlarged company was Julián Trincado, who had been named general manager of Fuerzas Eléctricas del Noroeste in 1971 before becoming the company’s managing director, a position he retained after the merger. In 1983, Trincado was appointed chairman of the new company.

Over the next ten years, Trincado not only led Fenosa back into the black but was also credited as being the chief architect of Fenosa’s transformation from a relatively minor power supplier to becoming a player on the international stage. By the beginning of the 1990s, Fenosa had managed to cut out a large part of its debt, trim down its payroll, and increase sales. A key part of the company’s success was its early decision to diversify its operations in preparation for the coming deregulation of the European electricity market slated for the late 1990s.

A Diversified International Company in the 21st Century

Fenosa’s diversification took two different tracks. The company began expanding its core electrical power generation operations by moving into new and alternative technologies, including the building of windmill farms in the early 1990s. But Fenosa also began developing interests and holdings outside of its core business, diversifying into a variety of industries, such as construction and building materials, mining, and telecommunications. This effort was in part a response to the growing strength of state-owned utility Endesa, which had begun buying stakes in a number of Spain’s smaller, private-sector utilities. In 1991, for example, Endesa bought up nearly 10 percent of Fenosa in what was seen as part of the Spanish government’s effort to encourage the consolidation of the Spanish energy sector.

Fenosa remained independent, however, and continued to build up its diversified operations. International operations came to play an increasingly important role in the company’s growth during the 1990s. Fenosa’s successful turnaround had inspired a number of other utility operators around the world, and the company now found itself with a thriving consulting business, later brought under business unit Fenosa Soluciones. By the mid-1990s, Fenosa was present in more than 20 countries worldwide, particularly in the Asian and Latin American markets. Among the company’s investments made during the time was a stake in Argentina’s Emersa ni 1995 (sold off in 1999) and the purchase of a share in Iberafrica, based in Kenya, in 1996.

Fenosa also was quick to enter the growing telecommunications arena, including an early investment in mobile telephone operator Airtel. By 1996, Fenosa controlled more than 8 percent of Airtel’s shares. In 1998, Fenosa joined a consortium that included Telecom Italia and Endesa to acquire television broadcaster Retevision, formerly owned by the Spanish government. Then, in 2000, Fenosa and its partners bundled their various telecommunications and related operations into a new company, Auna, which was slated for a public offering in the first half of 2000.

Company Perspectives:

“Drawing value from our expertise” is one of the mainstays of our business success. It encourages us to innovate and to set and enforce best practice standards to the benefit of our customers. We invest 27 million Euros in Professional Development every year to ensure ongoing improvement of our knowledge and quality competencies.

In 1997, the Spanish government passed legislation deregulating parts the country’s electricity system in preparation for the European-wide deregulation scheduled to begin in 1999. The new system separated the electrical power industry into two systems—Transmission and Distribution, which remained regulated by the Spanish government, and Generation and Retailing, which was deregulated and thus opened to competition, both within Spain and, later, across European borders. The new system freed up Fenosa and other Spanish operators to begin constructing new power generation facilities and gave them full access to the country’s distribution grid, which in turn enabled
companies to compete against each other for consumer, corporate, and industrial customers.

As a result of the new legislation, Fenosa began restructuring its operations, creating a separate subsidiary for its generation operations. In 1998, Fenosa went a step further, forming a new company, Unión Fenosa Generación (UFG) in partnership with the United Kingdom’s National Power, which paid the equivalent of nearly EUR 600 million for a 25 percent stake in UFG. Fenosa, which had begun developing a new power station for Spain’s Basque region, also began preparing to sell off its Airtel holding, as it built up a war chest of nearly EUR 2 billion to continue its investment and expansion drive.

The company stepped up its international expansion in the late 1990s with a series of purchases which made it a key figure in the utilities sector in a number of countries. Fenosa’s investments included a stake in the Philippines’ Meralco I in 1997 and Meralco II in 1999 as well as in Bolivia’s TDE. Latin America in particular attracted Fenosa’s attention, with the purchases of Mexico’s Hermosillo and Panama’s Edemet-Edechi in 1998, then Edenmorte-Edesur in the Dominican Republic, Deocsa-Deorasa in Guatemala, and GAP in Mexico in 1999. The company also moved into the United Kingdom, buying up smallish water and electricity provider Cambridge Water that same year.

Fenosa’s Spanish operations suffered a setback in 2000, when the company launched a EUR 2.6 billion takeover of the country’s number four electrical company, Hidrocatabrico, outbidding the United States’ Texas Utilities. Yet the Spanish government, in a move to protect the competitiveness of the Spanish market, vetoed the purchase. The company’s failure to expand in its domestic market encouraged it to step up its international purchases—by the end of 2000, Fenosa had picked up new operations in Colombia, Costa Rica, Nicaragua, and Uruguay, while boosting its presence in the Dominican Republic. In Mexico, meanwhile, the company won a contract to build its third electrical power generation plant, which, when completed, was expected to make the company the largest private electricity producer in that country. The company also entered the eastern European market through the purchase of Moldova’s Red Chisinau-Centro-Sur.

At this time, Fenosa was also preparing to enter a new market, that of the production, transportation, and distribution of liquid natural gas. The company scored its first success in that field with the award in 2000 of a contract from the Egyptian government to build a new natural gas liquefaction and export facility. Fenosa continued the expansion of its gas subsidiary, winning a contract to build regasification plants in Valentia and Ferrol, as well as its bid for a 20 percent share of the Algerian LNG pipeline. Fenosa also gained full control of its gas subsidiary when it bought back the 25 percent held by International Power, the successor company to National Power. At the end of 2001, the company began to supply industrial customers in Spain for the first time.

The diversified nature of Fenosa’s operations led it to shorten its name to Unión Fenosa in 2001. The company continued to develop its expansion plans, particularly in Mexico, where it announced its intention to spend more than EUR 1 billion to build three new power plants in that country. Yet the company was also preparing a massive investment campaign to build up its position at home, with plans to earmark as much as two-thirds of its investment budget on the Spanish market. Fenosa was especially keen to expand its share of the natural gas market in Spain, setting itself the goal of a 25 percent share of the market by 2005. By the end of 2002, however, the company appeared forced to take a breather: with its debt nearing EUR 7 billion, Fenosa was said to be looking for a new strategic partner and offered to sell 50 percent of its Fenosa Gas subsidiary for some EUR 1.6 billion.

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